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Pre Pack Administration

A Pre Pack Administration process is a powerful tool which facilitates the sale of an insolvent business to existing directors, a trade buyer or a third party.

Begbies Traynor has over 70 licensed insolvency practitioners and can accept appointment as Administrators.

Although administration and pre-pack administration are governed by the same best practice requirements, the pre-pack process differs in one key area – the sale of the business and any assets of the company is negotiated before the appointment of administrators and completes either immediately upon – or shortly following – the appointment. This differs from the standard process where administrators commence marketing of the business after their appointment.

Advantages of a Pre-pack

Allows for the sale of a business as a ‘going concern’ without impacting on the continuity of business operations upon appointment of an administrator

Preserves the value of assets (particularly ‘work in progress’) and debtors which often become more difficult to realise following the appointment of an administrator

An administrator may not always be able to trade a business without revenue streams decreasing. Completing a sale immediately upon appointment can prevent losses which would reduce funds available for creditors.
The appointed insolvency practitioner is in a position to choose the most appropriate buyer for the business assets, whether that is a third party wishing to use the assets in an existing business, or director(s) of the insolvent company about to start a new one.

The image and business ‘brand’ is unlikely to be compromised by adverse publicity, leading to the increased likelihood of jobs being saved and suppliers being paid under the new ownership.

The steps involved in a pre-pack administration

1. A company is under pressure from creditors and is threatened with receivership or liquidation.

2. A firm of licensed insolvency practitioners is contacted to discuss the situation. They perform a business assessment and provide a range of possible options.

3. If pre-pack administration is decided upon, the IP values company assets and prepares a Statement of Affairs. Begbies Traynor are licensed insolvency practitioners with offices nationwide – we offer advice and support to companies in distress.

4. If business assets are to be sold to an existing company, steps will be taken to ensure the buyer has the necessary funds. This includes the provision of management accounts and other information to the IP.

5. If the intention is to transfer the assets to a new company, or ‘newco,’ cash flow, profit and loss, and balance sheet forecasts should be provided to demonstrate the viability of the new company, and their ability to purchase the assets. Assistance to buy in the form of asset-based lending may be available.

6. The company is placed into administration, suspending all legal actions against them, and assets are sold immediately.

7. The administrator organises a creditors’ meeting during which an explanation for taking this insolvency route is provided, and at this stage, a recommendation for liquidating the company is often given.

8. The IP repays creditors pro-rata, with funds received from the liquidated assets.

A word about insolvency regulations

The Enterprise Act, 2002, made it legal for an administrator to be appointed without reference to the courts. The administrator needs to be a licensed insolvency practitioner, bound by the Statements of Insolvency Practice (SIP).

The ethical nature of pre-pack administrations has often been called into question, and the addition of SIP 16 in 2009 was designed to allay some of these concerns. Issues covered by SIP 16 include:

• The relationship between an IP and the insolvent company’s directors prior to administration – they should make it clear that they are acting in the interests of the company rather than the directors.

• A full history of the decision-making process, and why pre-pack administration was chosen over other alternatives.

• Reassurances that the administrator worked in the best interests of the creditors.

• Disclosure of the identity of the buyer, and any connection with the insolvent company or its shareholders.

Transparency is paramount during a pre-pack administration. We at Begbies Traynor understand the issues and complexities, and are able to help companies negotiate the minefield of perceived ethical issues inherent in this process.

When pre-pack administration might be a good option

Pre-pack administration is not going to be the best option in all cases. It may be that a Company Voluntary Arrangement would be a better choice, or possibly a Creditors’ Voluntary Liquidation.

The main criteria for a pre-pack administration is that it must be in the best interests of creditors as well as those of the company, and the requirement to show proof of this has been discussed above.

Assets need to be worth enough to pay secured creditors, otherwise they may force the company into receivership. If assets are valued highly enough to repay secured creditors, pre-pack administration could be a good choice. Begbies Traynor can arrange for asset valuation to determine the best route.

A company already insolvent and unable to repay unsecured creditors may find that pre-pack administration is beneficial for them, and can be justified because the unsecured creditors would not be paid under an alternative route.

The pre-pack administration process is transparent in the right hands. The IP is expected to market the business to allow third parties or trade buyers to participate in the purchase of assets should they wish. This alone demonstrates the ethical approach required by law, and prevents potential abuse of the system.

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Advice You Can Trust

Insolvency Practitioners Association Institute of Chartered Accountants in England and Wales R3: Association of Business Recovery Professionals ICAEW Business Advice Service Turnaround Management Association ACCA (the Association of Chartered Certified Accountants) ICAS | The Institute of Chartered Accountants of Scotland
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